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He said he would also vacate his party's Senate leadership at a meeting of Liberal senators to be convened prior to the resumption of Parliament for the budget session.

"It has been an extraordinary privilege to serve as a Liberal senator for South Australia since 1993," he said.

"I thank the South Australian Liberal Party and the people of South Australia for the opportunity they have given me.

"I am also very grateful to my Liberal Senate colleagues for having elected me to be their leader following the 2007 election.

"I have had the good fortune to have served as a minister for 10 years, including nine in the cabinet; to be Australia's longest-serving finance Minister; and to have been Coalition Senate leader for the last four years."

As news of the retirement filtered through today, his colleagues acknowledged some had expected him to leave after the 2007 election loss.

Key members of the Howard government including Alexander Downer, Peter Costello and Brendan Nelson have all left since the last election.

Abbott pays tribute

Opposition Leader Tony Abbott paid tribute to Senator Minchin's contribution to political life, describing him as a pillar of strength for the Liberal Party.

"Senator ... Minchin has dedicated his entire career to public service and has been a pillar of strength for the Liberal Party and the broader Coalition," he said in a statement.

"On behalf of the federal Liberal parliamentary team and his many friends in Coalition, I wish Nick, Kerry and their family all the very best for their future.

"Nick has made an enormous contribution to the Liberal Party and Australian public life in a parliamentary career spanning two decades," he said.

"As one of the most senior members of the Howard government, Nick served with distinction in a number of portfolios and was a significant strategic counsel to his cabinet colleagues over many years.

"His legacy includes leaving the nation's finances $20 billion in surplus and setting aside savings for Australia's future in the $60 billion Future Fund," he said.

"A highly respected minister, Nick successfully managed a number of complex issues such as the passage of native title legislation and the sale of the final tranche of Telstra shares."

Big loss: Howard

Former prime minister John Howard said Senator Minchin's decision to retire at the next election would be a big loss to the Liberal Party and Australian politics.

"I both understand and respect his reasons for retiring," he said in a statement.

"Senator Minchin was a skilful and effective state director of the Liberal Party before coming to Parliament," Mr Howard said.

Senator Minchin was a close ally of Mr Howard during his prime ministership.